Dodd-Frank Bill
Floor Speech
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Mr. President, I appreciate the leadership of my colleague from Ohio, who has brought such a focus on ending predatory activities, helping our financial system work for working Americans. Indeed, that is certainly what all of our effort is about on the fifth anniversary of the Wall Street reform bill, the Dodd-Frank bill. My colleague was talking about the Humble Home mortgage, which was turned into a predatory instrument that instead of building the wealth of the middle class of America was designed to strip that wealth. There was the two-year teaser rates in which interest rates would go from 4 percent to 9 percent, more than doubling. Liar loan underwritings, in which the loan is way too large for a family, were given to a family just to reap the immediate benefits on behalf of the mortgage broker: the immediate commissions, steering payments and kickbacks that were paid to mortgage originators to steer their clients from the prime loan they qualified for into the subprime loan.
Now, thankfully, as the Senator from Ohio outlined, we have ended those predatory practices and we must not let those practices return.
Homeownership has been the foundation for middle-class wealth--homeownership, education, and good-paying jobs. We cannot take away homeownership as a significant part of the American dream, the dream to control your own space, the king or queen of your own castle, and certainly to build the equity that puts your family on a strong financial foundation.
Wall Street added to this particular story because they took these predatory teaser rate loans and put them into securities. One can think about securities as a box full of mortgages. Those mortgages generate a certain cashflow, and you sell the cashflow. That is what a security is. So these securities were only as strong as the mortgages that were in the security box, and those mortgages were deeply flawed. When the interest rate went from 4 percent to 9 percent, a family's payments doubled. They weren't able to make their payments because the underwriting had been inappropriate from the beginning, and they weren't able to get out of the loan because there was a prepayment penalty if they tried to get out of the loan. That was a steel trap that locked families into these inflated interest rates and eventually destroyed their finances. So we ended all that.
Think about what Wall Street did. They took these mortgages and set up a securities waterfall--AAA, AA, and so forth. They got ratings on these securities as if these home loans were the same sound, good home loans of the past, not these new steering payment, prepayment penalty teaser-rate loans that had started to become so common and such a different instrument. Wall Street said we will make a lot of money selling these securities.
Indeed, there were a couple other factors that came into play. Not only did credit agencies give them great ratings despite the underlying flaws, but there was also insurance that could be bought to protect the security in case it would fail. It was called a credit default swap or CDS. For a few cents you could buy insurance to make sure the security was good. Of course, insurance is only as strong as the insurance company behind it, and the purchasers didn't know the details of that because it went through the middlemen in Wall Street. It turned out that AIG, the American Insurance Group, was issuing this insurance in vast quantities, not doing what an insurance group normally does, which is set aside reserves to cover potential losses. Indeed, they were just on a short-term upward--hey, we can sell these insurance policies called CDS or credit default swaps for a ton of money for short-term profits and long-term irresponsibility.
So let's fast-forward from 2003, when the predatory loans came into popularity, and now we are in 2008 and mortgages are starting to fail, the securities are starting to fail, and then of course the insurance on those securities failed. Meanwhile, you have investment houses. For example, Lehman Brothers in 1998 had $28 billion in proprietary holdings, and by 2006 that had expanded to $313 billion against a capital base of just $18 billion in common equity. Think of that leverage--$313 billion in holdings and a base of $18 billion. That enormous leverage meant that if there was just a slight decline in the value of the products they were holding, then the whole firm was going to come tumbling down. Because these securities started to fail, they didn't have just a slight decline, they had a big decline. Suddenly, you have a major investment house, Lehman Brothers, out of business.
That sent shock waves through our entire financial enterprise because a lot of the financing--short-term financing--was done through 24-hour financial transactions called repurchase agreements or repo agreements. Repurchase agreements--you sell an asset for 24 hours, you get the money, you buy it back 24 hours later, and then you resell it. That means every 24 hours you have to come up with the cash to buy back this repo financing. When the underlying value started to go down, the company couldn't come up with the funds to execute the repurchase agreements, so they had to do a fire sale of their assets. Well, if they do a fire sale of their assets, that means for every other company that has similar products, the value of their products now goes down the tube overnight, and then they have problems. So you have a domino effect--a contagion that spreads through the financial industry.
Let's trace this back in simple circumstances. You had healthy homeowner loans, fully amortizing fair loans replaced by predatory teaser-rate loans leading to securities based on these faulty predatory mortgages. These securities became a major financial instrument. That financial instrument collapsed when the mortgages collapsed. There was a domino effect, a contagion that brought down our entire financial house.
The American worker was on the losing end of this house of cards. American workers lost their jobs. American workers lost their retirement savings. These American workers often lost their homes because after losing their jobs, they couldn't pay for their home or because the teaser-rate mortgage doubled in monthly payments, they couldn't make those monthly payments.
That type of destruction in which Wall Street casinos fared so well and American workers were so destroyed must not happen again. That is what the Wall Street reform bill is all about. On the fifth anniversary, we have ended through the Volcker rule the proprietary trading that was basically large hedge funds embodied within banks being essentially done on the backs of Federal deposit insurance; that is, the government was insuring the banks that were engaging in these highly leveraged hedge fund operations. That is just wrong.
If you want to operate a hedge fund, absolutely, get your investors, place your bets, and if you go down, the investors go down, but the banking system doesn't go down. We must not allow these highly leveraged hedge funds to be operating inside of our core banking system.
The phrase that was often used as we were working on this 5 years ago was ``Let's make banking boring again.'' Take deposits, make loans, and through those loans fuel the success of our families and our businesses. But if you want to be a high-risk investor, do it somewhere else.
That is the core story about shutting down the Wall Street casino. This is the Wall Street casino before the Dodd-Frank Wall Street reform bill: Sorry, we are closed; afterwards: Well, I am not sorry they are closed because we have rebuilt a financial system designed to work for working Americans, and that is a good thing.
I look forward to turning this over to my colleague from Delaware.
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